There is some big M&A news in the oil & gas space this morning as Chevron (CVX) announced that it will acquire Anadarko Petroleum (APC) for $65 per share in a deal worth $33 bln. The deal is structured as 75% stock and 25% cash. Chevron will also assume estimated net debt of $15 bln. The transaction has been approved by the Boards of Directors of both companies and is expected to close in 2H19.
Anadarko is one of the world's largest independent exploration and production (E&P) companies with 1.47 bln barrels-equivalent of proved reserves. While Anadarko is focused more on just exploration, Chevron is better described as what's known as an integrated energy company, meaning that it's involved in virtually every facet of the energy industry, from exploration to selling retail gasoline at Chevron stations and the many stages of production, transportation, and refining in between. Anadarko sells its crude oil to refiners.
Why do this deal? Chevron notes that this deal will significantly enhance its upstream portfolio and further strengthen its positions in large, attractive shale, deepwater, and natural gas resource basins. Further enhancing the deal is Anadarko subsidiary Western Midstream Partners (WES), a midstream company whose assets are well aligned with the combined companies' upstream positions. Also, CVX estimates that the transaction will generate annual run-rate synergies of approximately $2 bln and that it will be accretive to free cash flow and EPS one year after close.
CVX notes that the combination of the two companies will create a 75-mile-wide corridor across the most attractive acreage in the Delaware basin, extending Chevron's leading position as a producer in the Permian. It also enhances Chevron's existing high-margin position in the deepwater Gulf of Mexico and extends its deepwater infrastructure network. Finally, through the transaction, Chevron will gain another resource base in Mozambique to support growing LNG demand.
In sum, Chevron is making some waves here. It has been only 15 months or so since its CEO Michael Wirth (took over in Feb 2018) was promoted from within. As oil supply has increased with the boom in shale drilling, the goal for big oil companies has been to become more efficient. One way to accomplish that is to get larger to achieve greater economies of scale.
This deal makes CVX quite a bit larger. The deal does make sense. It provides attractive acreage and increases CVX's exposure to the lucrative Permian shale-oil region. Another aspect to the deal, supported through the above-mentioned Mozambique base, is that it's a play on what some see as the future of energy: LNG. LNG is increasingly being seen as a transition fuel. It's a cleaner fuel than crude oil, and that's important as we battle climate change. With this potential noted, the deal's ability to grow CVX's LNG business certainly presents an attractive opportunity.